In our report on the oral argument in Sunoco, which took place back in January, we remarked that the Third Circuit panel seemed skeptical of the Tax Court’s decision, even if the panel had not yet mastered the complexities of the case. It took more than eight months, but the Third Circuit has now issued a comprehensive opinion reversing the Tax Court and holding that it lacked jurisdiction to consider Sunoco’s claims for additional overpayment interest. The court’s opinion tracks the government’s position fairly closely, and it accepts the government’s view that Estate of Baumgardner v. Commissioner, 85 T.C. 445 (1995), is correctly decided but applies only to claims for deficiency (i.e., underpayment) interest. That case cannot help Sunoco with its efforts to receive additional overpayment interest, which it could have obtained only by bringing suit in the Court of Federal Claims.

The Third Circuit explains that the Code gives the Tax Court jurisdiction over claims for overpayment interest only “in two very narrow circumstances,” under sections 6512(b)(2) and 7481(c), and neither of those sections come into play in Sunoco’s situation. The court summarized its view of the critical defect in Sunoco’s position as follows: “The overpayment interest at issue here is not attributable to any decision of the Tax Court . . . . Rather, the interest at issue here arises from overpayments that were refunded or credited before this case began. We can find no statutory authorization for the Tax Court to determine this kind of claim.”

If Sunoco decides to seek further review, a petition for rehearing would be due on November 21, and a petition for certiorari would be due on January 5, 2012.

As we have previously reported, the Third Circuit is considering a tricky issue relating to the Tax Court’s jurisdiction to resolve disputes concerning overpayment interest. At the oral argument, the court explored different facets of the issue, even while joking about its complexity. At one point, one of the judges appeared to question whether the Tax Court’s Estate of Baumgardner case was correctly decided, even though the IRS had acqueisced in it. Government counsel declined that offer, instead adhering to the view that Baumgardner is different because it involved deficiency interest rather than overpayment interest. Taxpayer’s counsel invoked Code section 7481(c) as a possible alternative jurisdictional basis for the Tax Court, but the government responded that section 7481(c) could not apply to Sunoco’s situation. In response to a question, government counsel acknowledged that the dispute in Sunoco would not affect many taxpayers, as they usually bring overpayment interest claims to the Court of Federal Claims.

Although no precise consensus emerged from the court’s questions and answers, the panel seemed to exhibit sufficient skepticism about the Tax Court’s reasoning that practitioners should be cautious in placing much weight on the Tax Court’s decision. There is certainly a substantial risk that it will be reversed.

The Third Circuit has revised its January oral argument calendar and rescheduled the oral argument in Sunoco for the morning of Tuesday, January 25. The case had been scheduled for argument on the previous day. The panel that will hear the case is Chief Judge Theodore McKee, Judge D. Brooks Smith, and Judge Richard Stearns, a district judge from the District of Massachusetts who is sitting by designation.

On March 5, 2010, the government filed its reply brief in its appeal from the Tax Court’s decision in Sunoco Inc. v. Commissioner, 122 T.C. 88 (2004), thus completing the appellate briefing. The case raises a novel issue concerning the Tax Court’s jurisdiction to determine overpayment interest. Sunoco filed a petition seeking redetermination of deficiencies for its 1979, 1981, and 1983 tax years. In an amended petition, Sunoco reported that certain issues had settled but argued that the IRS had committed errors in calculating the interest on underpayments and overpayments arising out of those issues because it used incorrect starting and ending dates. The IRS moved to dismiss Sunoco’s claims for additional overpayment interest on the ground that Code section 6512 does not give the Tax Court jurisdiction to make a determination of overpayment interest with respect to overpayments not at issue in the case. The Tax Court denied the motion, holding that it had jurisdiction over Sunoco’s claims because the court would be resolving the same issues regarding starting and ending dates in connection with disputes over underpayment interest that were unquestionably before the court.

The Tax Court’s decision is a narrow one, finding that the settled principles of Estate of Baumgardner v. Commissioner, 85 T.C. 445 (1995), apply in Sunoco’s unusual circumstances because the date issues necessarily affect both underpayment interest and overpayment interest. The government, however, objects that Baumgardner is limited to underpayment interest and that Sunoco opens a Pandora’s box with broad implications by holding that section 6512 can give the Tax Court jurisdiction to resolve a dispute over overpayment interest. In the government’s view, there are no circumstances in which the overpayment jurisdiction of section 6512 can cover a claim for overpayment interest.

Because the appeal of Sunoco was delayed for years while a motion for reconsideration was pending, actual events cast some doubt on the government’s claim of broad implications. The case was decided in 2004 and in the past six years, the Tax Court has had little occasion even to cite it, much less to use it to open the gates to all sorts of taxpayer claims for overpayment interest. Nonetheless, the case has finally reached the Third Circuit, and that court will now decide whether the Tax Court overstepped its bounds in applying the principles of Baumgardner to overpayment interest in this context.

About Miller & Chevalier’s Tax Appellate Blog

Miller & Chevalier was founded in 1920 as the first federal tax practice in the United States. For nearly 95 years, the firm has successfully represented the most sophisticated corporate clients in all facets of federal income taxation. Miller & Chevalier’s Tax department serves clients headquartered throughout the U.S. and around the world and, over the past several years, has represented approximately 30 percent of the Fortune 100 and more than 20 percent of the Global 100. Our clients come to us to solve the thorniest of tax issues, and we have litigated many of the most significant tax cases on record.

The Tax Appellate Blog is intended to be a resource for information on important tax cases under consideration in the appellate courts. It will feature insightful commentary on the issues and provide a dedicated site for following the progress of these cases.

Authors

Steve Dixon is a Member in the Tax Department at Miller & Chevalier. He specializes in controversy and litigation, representing taxpayers in the Tax Court and Federal courts.

Laura Ferguson is a Member of the Supreme Court and Appellate Litigation Group at Miller & Chevalier and has successfully briefed and argued six cases at the U.S. Courts of Appeals in the past two years. Ms. Ferguson also has extensive experience litigating complex, high-stakes tax cases at the Tax Court and federal district courts.

Alan Horowitz is the former Tax Assistant to the Solicitor General at the Department of Justice, where he briefed and argued numerous tax cases in the Supreme Court. He is currently the head of the Supreme Court and Appellate Litigation Group at Miller & Chevalier.